Spring is both a blessing and a curse for car dealers.
The blessing, of course, is the increase in used vehicle sales most dealers enjoy this time of year. Consumers are shaking off winter and purchasing cars as the temperatures rise and tax refunds aid their buying power. This year appears to be especially strong — in part because many consumers have held off on a car purchase and their current vehicles need replacing.
The curse comes from the temptation to acquire more used vehicle inventory when spring-time used vehicle sales are hot and strong. The temptation is like a wind that gets stronger each time a sold car crosses the curb — it feeds every dealer’s internal fire to sell more cars and make more money
By my estimate, this temptation to increase inventory levels reaches its peak in April and May, which makes these months arguably the trickiest time of the year in used vehicles: You feel the need to acquire more inventory to sell more cars, while summer stands ready to dish out softer wholesale values and a slower pace of sales.
I’m not suggesting dealers shouldn’t follow their retailing instincts if their local market suggests it’s a good time to step up their used vehicle inventory investments. However, I’d urge dealers to review the following operational pointers before they send their buyers and managers out with an open checkbook:
- Review your current inventory turn rates. It’s a never-ending challenge to manage used vehicles as investments, and consistently maximize your ROI and profitability in the shortest amount of time. Among velocity dealers, the best performers consistently turn their inventory nearly 20 times a year. But these dealers are like elite athletes — high metabolisms and constant, on-the-stick workout ethics. The majority of velocity dealers aim to turn their inventories at least 12 times a year, which is no easy task to achieve. If a dealer isn’t meeting the 12x/year inventory turn standard, I typically urge them to avoid buying additional inventory. In my view, they haven’t really earned the right to do so.
- Be disciplined about your exit strategy. I recall fielding a fair number of calls from dealers with too many aged cars last August and September. I also remember a sizable number of these 60-day-plus units came from decisions in late spring to step up used vehicle acquisitions and keep sales humming. There were a variety of reasons dealers ran into trouble with these cars — they weren’t right for the market, they paid too much, they had sky-high asking prices. Whatever the cause, dealers were reluctant to take their lumps and move on. A reminder: For many velocity dealers, 45 days is the new retailing timeline for used vehicles in today’s market.
- Beware of potential process problems. More cars means more work — for everybody. It’s not uncommon for top-performing dealers to see their inventory turn rates and processes slow down as they build up inventory levels. The decision to increase inventory should not be made in a vacuum — in particular, your detailing and reconditioning teams need to know ahead of time that they’ll have more vehicles to address in a timely fashion to ensure the fresh cars are processed efficiently to maximize their profitability and ROI potential. A benchmark: Today’s best-performing dealers aim to get their used vehicles retail-ready within three days of their arrival at the dealership.
- Double-down on your inventory metrics oversight. It’s especially important for dealers to heed the market days supply and cost to market metrics on every car as they step up their used vehicle acquisitions. The metrics are best guides to ensure you “make your money when you buy a car” and set the stage for an appropriate pricing strategy for every unit. Likewise, careful attention to these metrics ensures a greater degree of buying discipline on the part of managers and buyers seeking to fulfill the dealer’s directive to “get more cars.” I also encourage dealers to ensure that at least 50 percent of their inventory is under 30 days of age — a standard that assures merchandising and pricing adjustments on all vehicles are made in a time-sensitive and profit-minded manner.
Like a lot of dealers, I’d list spring as my favorite time of year. The air is full of possibility and promise. The challenge for dealers, of course, is to channel this possibility and promise into increased profitability and ROI as you choose to acquire more cars.